"Learn from the mistakes of others. You can't live long enough to make them all yourself." - Eleanor Roosevelt
Wise words from Eleanor Roosevelt, an American First Lady, politician, diplomat, and activist who also served as a United Nations spokeswoman. Her advice is relevant for commercial tenants who do well to learn from others' mistakes. Here are four common lease negotiation mistakes that tenants must avoid, for they have caused much harm to many tenants.
Mistake 1 – Too little, too late
"It is always too late, or too little, or both. And that is the road to disaster." - David Lloyd George
A few months ago, I had a call from a small business owner seeking to extend her tenancy at her current premises after the lease expiry. Her business goodwill was inextricably linked to the location. She had just received the lease from the landlord's solicitor and was concerned about the changes from the current lease, which included increased annual escalation, a significant uplift in the rental, and the introduction of a development clause that created an uncertain tenure. The problem was that the lease negotiation had drifted, so the new lease was provided with only six weeks until the lease expiry. This example of too little, too late left the owner with no time, no negotiating leverage, and no option other than executing a lease that significantly increased her business risk.
Doing too little, too late is commonplace and this mistake always harms the tenant and advantages the landlord, particularly when a tenant is seeking to take on a new leased premises or to restructure an existing lease arrangement. It is important to note that delay equals lost tenant leverage throughout the lease cycle, and not just during the initial lease negotiations, and that tenants that get to lease events early will achieve more favourable outcomes.
Mistake 2 – Not starting with the end in mind
"To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you're going so that you better understand where you are now and so that the steps you take are always in the right direction." - Steven Covey
At LPC, we urge clients to fully consider their business strategy, outlook, objectives, and risks before considering their accommodation strategy, for accommodation commitments (be they leasehold or freehold) are long-term and will inevitably harm the business if misaligned with the business requirements and risks into the future. It is all too common for commercial tenants not to give enough upfront attention to aligning their accommodation strategy with their business outlook and risks, and this results in an evolving discovery of the same during lease negotiations, together with an evolving loss of leverage. As Steven Covey advises, it is essential "to know where you're going so that … the steps you take are always in the right direction". This clarity facilitates leverage as it facilitates leverage via the discovery of viable alternatives, which creates competitive tension.
Mistake 3 – Not asking the right questions of the right people
"Never take the advice of someone who has not had your kind of trouble." - Sydney J Harris
The structure of the commercial leasing sector favours landlords as they are consolidated, have asymmetrical access to information, and their business is property. On the other hand, tenants are fragmented, have far less access to information, and their expertise is their business, not commercial leasing. The result is that most commercial property professionals are linked to the supply side (landlords, leasing agencies, developers), and the advice given by these practitioners is conflicted and favours the landlord, not the tenant. For example, a leasing agent's advice to a tenant is conflicted as it is in their interests to keep rentals high and to preserve inflexible lease norms as their commissions and livelihoods are linked to these outcomes.
Just as important as asking the right people is, so asking the right question is equally important. A helpful starting point is to remember that a lease agreement is, in essence, a negotiated outcome that starts with a blank piece of paper, which means it is essential to ask and to ask well. It is remarkable how much tenant-side leverage is lost by not asking or assuming that the lease provision is a given that is not subject to negotiation. An unusual example of this was a property lawyer who sought LPC's help negotiating as a tenant for a business he had purchased. We sought to add a provision to the lease by which the landlord compensated the tenant for impaired utilisation of the leased asset. The lawyer incorrectly responded that this provision could not be negotiated, as he had never previously negotiated this provision.
The takeaway is that we should never assume asking is illegal or improper and should never be afraid to ask.
Mistake 4 – Not "making sure"
"If you can't win, make sure you don't lose." - Johan Cruyff
Many years ago, I managed a multi-site industrial supply business and developed a plan to restructure our branches into franchises. I recall relaying the plan to the group CEO who simply said, "make sure, make sure, make sure', a piece of advice that resonates when it comes to commercial leasing for not making sure comes back to haunt the tenant.
Regrettably, it is all too common for tenants to not think through the risks of what gets signed, only to regret this post-lease execution. Perhaps the most common example of not making sure, is the recent event of the pandemic and the fact that hardly any tenants had recompense built into their lease in the event of impaired utility of the leased asset.
A preventative mindset that anticipates the impact of business risk and external changes on accommodation needs is most helpful during lease negotiations as this helps one to focus on risks that impact requirements and bring these risks to the negotiating table.
Final comment
Learning from others' mistakes is an effective strategy for derisking commercial leasing arrangements, for many have already made big mistakes. Eleanor Roosevelt's advice is as relevant today as when she wrote it.
Why LPC?
At LPC, we partner with tenants and occupiers across Australia and New Zealand to optimise their office, industrial and retail property portfolios. We provide an integrated suite of services, including transaction management, portfolio and lease management and project management. We provide conflict-free advice and tenant representation, meaning we have no ties with owner-developers or landlords. Tenants' and occupiers' interests remain at the core of what we do as we negotiate on your behalf and endeavour to rebalance the scales in a market favouring landlords.
